Integral to the success of any mutual fund, fees and expenses can have a significant impact on the success of an investment due to the effects of compounding. These expenses will generally manifest as an indirect cost to the end investor through the form of management fees, administration fees and performance fees.
More often than not, a LIC/LIT will employ an external investment manager to oversee the construction and maintenance of the portfolio, with management fees seeking to recoup the costs associated with this fundamental outsourcing. Management fees tend to vary according to the fund’s investment mandate, typically ranging from 0.0%-1.5% p.a. on the value of the portfolio for the LICs and LITs within our universe of coverage. On the other hand, administration fees incorporate all other overheads incurred in the professional management of the fund. Examples include ASX listing fees, director, rent, audit, legal etc. Often subject to a high watermark mechanism, the investment manager may also be entitled to a performance fee for periods of relative or absolute outperformance. The Indirect Cost Ratio (ICR) seeks to aggregate this triage of expenses and quantify the total cost that is incidentally borne by the investor. We have summarised these expenses relative to the average pre-tax net tangible asset value for the half year ended 31 December 2020, producing ICRs both with and without consideration of performance fees.
On the basis of excess 5-year pre-tax NTA risk-adjusted returns, the best performing domestic equity LIC/LIT has been Ryder Capital (ASX:RYD), with a Sharpe Ratio of 0.92 (relative to the return on a 10 Year Australian Government Bond as the appropriate risk-free rate). While fees undoubtedly weigh on performance, investors should be aware, however, that certain strategies can lend to a more cost intensive execution than others. Heavily active portfolios, particularly those with high turnover ratios, may incur greater brokerage expenses, while global managers may require extensive investment team depth in order to evaluate a wider investable universe. Similarly, a lack of research coverage in a market subset may give a manager the consistent ability to deliver attractive risk weighted returns, benefitting from market inefficiencies. Ultimately, the fee structure must be evaluated within the context of the investment mandate and peer offerings.
Bell Potter’s Indicative NTA tracks the ‘indicative’ movement of a LIC’s underlying NTA each month by monitoring the percentage movements of the disclosed holdings and using an index to track the movement of the remaining positions. The Indicative NTA works best with LICs that have a high percentage of investments concentrated in its Top 20, regular disclosure of its Top 20, lower turnover of investments, regular disclosure of its cash position and the absence of a performance fee. We have also included an adjusted indicative NTA and adjusted discount that removes the LIC distribution from the ex-dividend date until the receipt of the new NTA post the payment date. This report is published each Monday prior to the market open and is available on a daily basis. Intraday indicative NTAs will be available on request through your adviser.
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